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How to Manage a Loan Default Effectively

By Prabhat Singh - Jun 21,2022
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When money is scarce, dealing with financial obligations can be a nightmare. However, certain situations are time-sensitive, like your favourite property going on sale or unpredictable hospitalisations. People seek out different avenues to fulfil these incoming expenses, often taking out loans. 

Traditionally, a bank’s most favoured feature is its ability to sanction loans. Even NBFCs and payment banks can offer customers personal loans without collateral. Unfortunately, this ease of availing a loan has led to a steady rise in the number of repayment defaults. Whether caused by job loss, medical surgeries or poor financial management, it takes a heavy toll on your credit score. 

Have you fallen victim to loan defaults? It’s okay, don’t be ashamed! Fortunately, there are various ways to rise out of this situation. The following steps can help you get out of loan defaults. 

Inform your lending partner

Let your lending partner know in advance about potential payment delays. Explaining your current financial situation might fetch you some leniency in the interest rate for a brief period. Though banks are not subject to adhering to such requests, and it’s entirely up to them. 

So, always make a strong case for yourself while explaining financial constraints. However, avoid making false claims that could hold you legally liable to deal with the consequences of such acts. 

Loan Restructuring 

After informing the lender about the default, try to negotiate the terms of the loan by requesting restructuring. Request an increase in the tenor or lower EMIs, or attempt to reduce the interest rate for manageable repayments. 

Deferred Payment Option 

While seeking ways to deal with loan defaults, request your bank for a deferred payment option. Here, the bank will temporarily hold off on the interest rate and allow you to recuperate from financial setbacks. Wisely use this buffer period to accumulate additional money and repay the loan.  

Stop Leveraging Credits 

Once you become a loan defaulter, stop using your credit cards for any transactions. Taking on any more debt with outstanding loan repayments is risky and could adversely impact your financial condition. Unless an emergency arises, hold off on using any more credit. 

Sell Underperforming Policies 

If your policies have been performing poorly, consider selling them off. The interest paid on the loan will be higher than the return you gain from the policy. So, utilise these underperforming policies by either selling them or taking a loan against your investments. It will allow you to consolidate all your debts and close them immediately. 

Reduce Your Expenses 

While a bitter truth to swallow, curtail your expenses during this period. Cut down on frivolous expenditures, or switch to cheaper versions of them! Until the outstanding dues are repaid, it’s inadvisable to continue this way. Start inculcating the habits of budgeting and expense tracking to identify unnecessary expenses. 

Leading a minimalistic life is a great way of reducing excess expenditure in your routine. Opt for local or off-brand products, try eating out less often or limit the number of indulgences. In the long run, practising self-restraint will positively reflect in your personal finance management. 

Use Salary Increments/Bonuses 

Any due salary increments or incoming bonuses can be re-directed towards repaying outstanding loans. Instead of giving in to impulsive urges, use the additional corpus to close your loan. That said, expedite the repayment process by using extra savings like a windfall to close the loan. 

Regardless of how well-maintained your finances may be, it’s important to prepare for such situations beforehand. Certain unpredictable financial obligations could strike the delicate balance of your budget and negatively impact your credit score. Furthermore, defaulting on loans will attract legal implications, as well.

While it’s recommended to avoid defaulting on loans, use the above-mentioned points to manage these situations effectively. 

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